Why Blockchain and Digital Transformation Go Hand in Hand

You’ve heard the term, but what on earth does it mean? Let’s start with the basics. A blockchain is a data structure that makes it possible to create a digital ledger of transactions and share it among a distributed network of computers. It uses cryptography to allow each participant on the network to manipulate the ledger in a secure way without the need for a central, often fee-charging authority.

Bitcoin and the mechanics of blockchain

If you are familiar with blockchain technology, it may be because of Bitcoin, the first app built using the platform in 2008. Bitcoin’s main premise is to digitally send payments between any two people or organizations without a third-party financial institution. Every time a transaction is made, it’s recorded on the blockchain ledger and each new block is tied to the prior ones via digital signature. Once a block of data is recorded on the ledger, it’s difficult to change or remove, and in order for someone to add a block to the chain, network members have to first ensure it’s valid.

A few key components underpin blockchain technology. First up is the network, which can vary depending on the organization setting up the blockchain. It might include everyone in the public domain (as in Bitcoin) or an exclusive group of known participants. The computers within each network are called nodes.

Then, there is the consensus mechanism, or the set of rules used to verify each transaction. In the Bitcoin blockchain, for instance, the consensus mechanism is called proof of work. Network participants run algorithms to confirm the digital signatures attached to blocks in order to validate new transactions. Once approved, transactions are packaged into a block. They are then re-distributed to all the nodes, which are responsible for ensuring that all records match.

For his article for the Wall Street JournalCIO Journal blog, writer Steven Norton consulted Guardtime, a company that sells blockchain-based products and services to organizations like Ericsson AB. Guardtime provided this example of a complex blockchain in action:

“Assume an organization has 10 transactions per second. Each of those transactions receives its own digital signature. Using a tree structure, those signatures are combined and given a single digital fingerprint — a unique representation of those transactions at a specific time.”

“Once validated, that fingerprint is stored in a blockchain that all the participants can see. A copy of that ledger is also sent back to each organization to store locally. Those signatures can be continuously verified against what is in the blockchain, giving companies a way to monitor the state and integrity of a particular asset or transaction.”

“Anytime a change to data or an asset is proposed, a new, unique digital fingerprint is created. That fingerprint is sent to each client node for validation. If the fingerprints don’t match, or if the change to the data doesn’t fit with the network’s agreed-upon rules, the transaction may not be validated. This setup means the entire network, rather than a central authority, is responsible for ensuring the validity of each transaction.”

Blockchain’s role in digital transformation

According to Bruce Hughes, an analyst for KuppingerCole who recently wrote about the benefits of digital business process management with blockchain technology for Computer Weekly, the emergence of distributed and decentralized ledger technologies with smart contracts and the Internet of Things will be instrumental in disrupting and revolutionizing business process management and business process optimization.

“Blockchains can holistically manage steps and relationships where participants will share the same data source, such as financial relationships and transactions connected to each step,” Hughes said. “Security and accountability is factored in, as well as compliance with government regulations along with internal rules and processes. The result is consistency, reductions in costs and time delays, improved quality, and reduced risks.”

Digital transformation is obviously one of the more complex challenges an enterprise can undertake, but the integration of IoT with blockchain makes it much easier. Considering the number of partners (internal, external, or both) involved in any given business process, a system in which a multitude of electronic parties can securely communicate, collaborate, and transact without human intervention is highly agile and efficient.

“Enterprises that embrace this phenomenon will be able to provide a better user experience, a more consistent workflow, more streamlined operations and value-added services, as well as gain competitive advantage and differentiation,” said Hughes.

But despite the obvious benefits, blockchain technology has been slow to catch on in the enterprise. One major reason is a general lack of standards. For example, should an organization use an open network or a permissioned (private) one? Who should regulate the technology to make sure blockchains are effectively regulating themselves, and what cybersecurity threats might arise that threaten a blockchain’s integrity?

Especially in the realm of manufacturing and supply chain management, warned Hughes, security authentication, management and communication protocols for IoT devices are still at an immature level, and distributed ledger technology itself often lacks the ability to handle and distribute large amounts of data.

Then, there’s the issue of interoperability. What software should be employed, and how do we get a large network of participants, most of which have a complicated web of information technology solutions in and out of the cloud, to agree to use the same technology? “Devices and equipment from different suppliers are currently unable to communicate with each other or the enterprise IT systems,” said Hughes.

With blockchain still in its infancy, these are all questions that financial institutions are beginning to answer as they experiment with different implementations. Those of us involved in digital transformation efforts in any industry should watch carefully and make note of their learnings.

One thing is for certain, though, blockchain isn’t going away. “It still remains vital to look at blockchains much like network standards: focus on the needs and the value proposition while avoiding getting too focused on specific, low-level technologies,” suggested Hughes. “Also, avoid too much investment in blockchain products beyond proof-of-concepts and experimentation until decisive standards and trends with a wide backing of key industry players occur. This relates in particular to smart contracts, smart objects and the emerging blockchain as a service.”

Have you dipped your toe into blockchain? What were the results? Comments are in the sidebar social sharebar.